China and europes partnership for a more sustainable world challenges and opportunities

China and Europe’s Partnership for a More
Sustainable World
Challenges and Opportunities


Transboundary environmental problems and European Union (EU)-China environmental trade,
investment, and technical interactions are multidimensional, multinational, and multilevel. Delving
into such themes to generate in-depth and policy relevant knowledge requires multi-country teams
with broad disciplinary expertise using diverse analytical tools and methodologies. China and
Europe’s Partnership for a More Sustainable World is such a work. Rich and comprehensive, it sheds
light on diverse topics like European investment in China’s environmental sector, Chinese
environmental FDI in Europe, environmental goods trade, EU and Chinese corporate social
responsibility concepts, and biomass utilization and will be of immense interest to academics,
businesspeople, and policymakers in China, the EU, and elsewhere.
– Jean-Marc F. Blanchard, Executive Director,Mr. & Mrs.
S.H. Wong Center for the Study ofMultinational
Corporations, Los Gatos, CA, USA
This book offers new insights into an understudied and very important topic – EU-China relations in
the environmental and energy field. The carefully researched chapters are rich in data and case
studies and illuminating analysis. This book is of interest to academics, practitioners, and
policymakers.
– Genia Kostka, Professor ofGovernance of Infrastructure
and Energy,Hertie School of Governance, Berlin, Germany
A multifaceted, interdisciplinary enquiry into what actually drives bilateral investment policies and
practices between the EU and China in their effort to pursue higher sustainability standards and the
greening of their respective economies. This book has the rare merit of striking the right balance
between theoretical and empirical research. While pragmatically recognizing the barriers to be faced,
it offers direct insights into economic, legal and technological options, which can feed directly into
policy formulation in both the EU and China, and adds a valuable building block to their joint
aspiration for a mutually beneficial cooperation.

– Andrea Ricci, Vice President of ISINNOVA – Institute
ofStudies for the Integration of Systems; Rapporteur of the
ECIntegrated Roadmap of the SET Plan and Chairman of
theEU Transport Advisory Group for Horizon 2020, Roma
In this book you will find the interesting outcomes of a four-year EU-funded research project about
the effects of EU-China cooperation in a very fast-moving field: renewable energies and
environmental industries. As the research skilfully combines economic, legal and engineering
approaches, the book is aimed at many readers – from academics and policy makers to general
readers.
– Augusto Ninni, University of Parma, Parma (PR), Italy


China and Europe’s Partnership for a More
Sustainable World
Challenges and Opportunities

Edited by
Francesca Spigarelli
University of Macerata, Macerata, Italy
Louise Curran
Toulouse Business School, Toulouse, France
Alessia Arteconi
Università eCampus, Novedrate, Italy

United Kingdom – North America – Japan
   India – Malaysia – China


Emerald Group Publishing Limited
Howard House, Wagon Lane, Bingley BD16 1WA, UK

First edition 2016
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makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or
implied, to their use.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN: 978-1-78635-332-0
The research leading to this book was funded by the IRSES People Marie Curie Action of the Seventh Framework Programme,
European Union FP7/2007-2013/ under REA Grant agreement no. 318908, POREEN.
This publication does not necessarily reflect the opinion of the EU.


Contents
List of Contributors
Foreword
Introduction

Part 1 Europe and China Integration through Trade and
Foreign Direct Investments
CHAPTER 1   Policies That Promote Environmental Industry in
China
Haitao Yin, Francesca Spigarelli, Xuemei Zhang and Hui Zhou

CHAPTER 2   The Environmental Goods Trade between China and

the EU: Development and Influencing Factors
Ruxiao Qu and Yanping Zeng

CHAPTER 3   International Integration and Uneven Development:
An Enquiry into the Spatial Distribution of Foreign
Firms in China
Hongbo Cai and Eleonora Cutrini

CHAPTER 4   The Liability of Foreignness of EU Environmental
Protection Companies in China: Manifestations and
Mitigating Strategies
Lee Keng Ng and Louise Curran

CHAPTER 5   The Renewable Energy Industry in Europe: Business
and Internationalization Models. A Focus on the


Chinese Market
Elena Cedrola and Loretta Battaglia

CHAPTER 6   China’s FDI in the EU’s Environmental Protection
Industries
Chunming Zhao, Mi Dai, Qun Zhang and Lei Wen

CHAPTER 7   Chinese OFDI to Germany in the Environmental
Industries: A Multiple Case Study
Katiuscia Vaccarini, Francesca Spigarelli, Christoph Lattemann,
Federico Salvatelli and Ernesto Tavoletti

Part II Environment and Regulations

CHAPTER 8   China: The Long March toward a Virtuous
Environmental Legal Framework
Lihong Zhang

CHAPTER 9   Chinese Environmental Protection: Between National
Laws and Governance System
Federica Monti

CHAPTER 10 Efficient Energy Systems in the Chinese Electricity
Sector: Some Legal Issues
Fabio Lorusso

CHAPTER 11 Corporate Social Responsibility Standards in Green
Energy Industry: A Comparison between European
Union and China
Giuseppe A. Policaro and Paolo Rossi

CHAPTER 12 Energy Investments in China and the Role of
Environmental Regulation: The Legal Perspective
Changmian Zhang and Piercarlo Rossi


Part III Alternative Fuels and Low Carbon Buildings:
Research Trends in Europe and China
CHAPTER 13 The Feasibility of Liquefied Methane as an
Alternative Fuel in Europe and China
Marco Spitoni, Fabio Polonara and Alessia Arteconi

CHAPTER 14 Vapor Compression Heat Pumps and District Thermal
Energy Networks for Efficient Building Heating and

Cooling
Neil Hewitt, Ye Huang, Mingjun Huang and Caterina Brandoni

CHAPTER 15 Research on Biomass Energy Utilization in Chinese
Rural Area
Xu Zhang, Mingling Zhai, Yanyan Wang, Yulei Gao, Haoliang
Zhao, Xiang Zhou and Jun Gao

CHAPTER 16 Novel Energy Systems for Smart Houses
Yong Li and Ruzhu Wang

Index


List of Contributors
Alessia Arteconi

Università Telematica e-Campus, Novedrate, Italy

Loretta Battaglia

University of Macerata, Macerata, Italy

Caterina Brandoni

University of Ulster, Newtownabbey, UK

Hongbo Cai

Beijing Normal University, Beijing, China

Elena Cedrola

University of Macerata, Macerata, Italy

Louise Curran

Toulouse Business School, Université de Toulouse, Toulouse, France

Eleonora Cutrini

University of Macerata, Macerata, Italy

Mi Dai

Beijing Normal University, Beijing, China

Jun Gao

Tongji University, Shanghai, China

Yulei Gao

Tongji University, Shanghai, China

Neil Hewitt

University of Ulster, Newtownabbey, UK

Mingjun Huang

University of Ulster, Newtownabbey, UK

Ye Huang

University of Ulster, Newtownabbey, UK

Christoph Lattemann

Jacobs University Bremen, Bremen, Germany

Yong Li

Shanghai Jiao Tong University, Shanghai, China

Fabio Lorusso

Istituto Universitario di Studi Europei (IUSE), Torino, Italy

Federica Monti

University of Macerata, Macerata, Italy

Lee Keng Ng

Curtin University, Sarawak, Malaysia

Giuseppe A. Policaro

University of Piemonte Orientale, Novara, Italy

Fabio Polonara

Università Politecnica delle Marche, Ancona, Italy

Ruxiao Qu

Beijing Normal University, Beijing, China

Paolo Rossi

University of Piemonte Orientale, Novara, Italy

Piercarlo Rossi

University of Piemonte Orientale, Novara, Italy

Federico Salvatelli

University of Macerata, Macerata, Italy

Francesca Spigarelli

University of Macerata, Macerata, Italy

Marco Spitoni

Università Politecnica delle Marche, Ancona, Italy

Ernesto Tavoletti

University of Macerata, Macerata, Italy

Katiuscia Vaccarini

University of Macerata, Macerata, Italy; Jacobs University Bremen, Bremen, Germany

Ruzhu Wang

Shanghai Jiao Tong University, Shanghai, China

Yanyan Wang

Tongji University, Shanghai, China

Lei Wen

Beijing Normal University, Beijing, China

Haitao Yin

Shanghai JiaoTong University, Shanghai, China

Yanping Zeng

Beijing Normal University, Beijing, China

Mingling Zhai

Tongji University, Shanghai, China

Changmian Zhang

East China University of Political Science and Law, Shanghai, China

Lihong Zhang

East China University of Political Science and Law, Shanghai, China

Qun Zhang

Beijing Normal University, Beijing, China

Xu Zhang

Tongji University, Shanghai, China

Xuemei Zhang

Shanghai JiaoTong University, Shanghai, China

Chunming Zhao

Beijing Normal University, Beijing, China

Haoliang Zhao

Tongji University, Shanghai, China

Hui Zhou

Shanghai JiaoTong University, Shanghai, China


Xiang Zhou

Tongji University, Shanghai, China


Foreword

I

n economic terms, the shift to Asia has been a fact since the beginning of this century. It is
difficult to make generalizations for a continent of more than 4 billion people but Asian
consumers are growing richer, with average earnings in many countries tripling over the past 10
years. China’s economy represented around 5% of world GDP in 2000 and it may account for
25% by 2050.
In terms of economic development, history is accelerating: it took 155 years for Britain to double
its GDP per capita, 50 years for the United States, and just 15 years for China. Over the last 10 years,
Asia has accounted for half of the world’s GDP growth. Forecasts indicate that Asian growth will
continue to outpace Europe and the United States.
With economic growth coupled with resource consumption, one can expect more constraints on
key resources. As people become wealthier, they use more energy (e.g., for mobility, air
conditioning, heating, and computing), more water, eat and waste more food. Efficiency gains are
often largely offset by the “rebound effect,” whereby technological improvements ultimately lead to
greater and not less consumption. This has been true for the electricity and in the transport sectors.
The recent progresses and new-found prosperity in China (and also in India, Brazil, and South
Africa) may have knock-on effects on the demand for and availability of global resources. Global
weather may become more volatile and severe (cf. hurricanes, disastrous flooding, extreme heat, and

shortage of water) while rising sea levels could devastate low-lying cities like Shanghai and Hong
Kong.
From a multilateral perspective, systemic governance of climate change has been agreed by 195
countries at the Conference of the Parties of the United Nations Framework Convention on Climate
Change (COP-21) in Paris in December 2015. The conclusions of the COP-21 envisage a reduction
of global greenhouse gas emissions to a level that limits the global average temperature increase to
below 2°C or 1.5°C above preindustrial levels.
From a bilateral perspective, this book entitled “Going Green: China-Europe Partnership’s for a
More Sustainable Word” – published in the frame of the POREEN Marie Curie Action P
( artnering
opportunities between Europe and China in the renewable energies and environmental industries )
brilliantly coordinated by Francesca Spigarelli – is emblematic of what two strong blocks can do
together by combining their investments, cross-fertilizing their knowledge, and cocreating their
futures.
The share of foreign direct investment, of megawatt of renewables installed, and the number of
energy-efficient buildings are illustrative of the major changes taking place in Europe and China. The
chapters of this book provide original analyses, recent key facts, and figures that pave the way toward
more sustainability. This notion, sometimes called an oxymoron, covers the traditional economic,
environmental, and social dimensions.
But in this trans-disciplinary book, sustainability also rightly addresses some sensitive legal
issues like liability and corporate social responsibility. The chapters well integrate social sciences
aspects (in the first two parts of the book) as well as science, technology, and engineering aspects (in
the last part of the book). Addressing both theoretical and real-life practices, many lessons and


opportunities can be drawn from this reading. From the European side, I will focus on five
dimensions.
The European Union (EU) 2020 targets for greenhouse gas emissions reductions, for increasing
the share of renewable energy, for improving energy efficiency, and for achieving 3% of GDP
dedicated to research and innovation may be inspiring. The Energy Union is going in this direction.

Smart growth (fostering knowledge, innovation, education, and digital society), sustainable
growth (making production more resource-efficient while boosting competitiveness), and inclusive
growth (raising participation in the labor market, acquisition of skills and fight against poverty) are
long-term leitmotifs that are good for people, the economy, and the planet.
The research efforts should stimulate technological but also social innovation and public sector
innovation. Climate change, urbanization, and relative resource shortages may fuel a shift away from
large coal power plants, petrol-engine cars, and energy-consuming buildings to decentralized
renewable energy production, small electric and hybrid vehicles, as well as passive houses.
Global connectivity is changing how people live, how they work, and how they think. ICT, the
Internet, and new mobile devices are and will continue to play a pervasive and transformational role.
In 2000, there were around 700 million mobile devices, most of which did not connect to the Web. In
2015, there were 7.6 billion mobile devices worldwide, many of which are smart and connected to
Internet. The European Digital Single Market follows common sense.
Europe needed over a century to develop the infrastructure to supply natural resources to the point
of use: sewage farms, ports, electricity grids, pipelines, rail, and road networks. Making significant
changes to this infrastructure will take decades. The new European “Circular Economy” paradigm
means a shift toward reusing, repairing, refurbishing, and recycling existing materials and products.
“Waste” can and should be turned into a resource.
These five dimensions are at the core of many EU–China collaborations like POREEN and
URBACHINA (a collaborative research project onSustainable Urbanisation in China: Megatrends
toward 2050) that feed scientifically into the “EU–China Urbanisation Partnership.” These initiatives
should be seen in conjunction with more technologically driven projects, mostly in ICT, energy, and
transport fields funded under the “Smart Cities and Communities,” including with the large scale
demonstrations, the so-called lighthouse projects.
In the near future, through Horizon 2020 – the European framework programme for research and
innovation – further EU–China cooperation could take place on sustainable urbanization, on resourceefficient urban agriculture, and on innovating nature-based solutions in cities, especially to enhance
the potential for international replication.
Green manufacturing and services, scaling-up of renewable energy, improvement of energy
efficiency, sustainable agriculture, and low-carbon transport will certainly continue to shape the EU–
China relationship. But resilience and trust should also underlie this relationship: Resilience for

dealing with natural, technological, and human changes; trust among actors and institutions, shared
conviction in the added value of the protection of collective goods like air, water, and public health.
Domenico Rossetti di Valdalbero
Principal Administrator at the European Commission,
Directorate-General for Research and Innovation


Introduction

F

or many years, the European Union (EU) and China have been developing a dialogue and
effective cooperation initiatives on the need to address the environmental issues. They have
found common ground on many key aspects and cooperation has been extensive in several
fields. Diplomatic efforts have contributed to strengthen partnering opportunities between the
countries.
The EU–China cooperation for environment protection has a quite long history. While the relation
started as a mainly trade-oriented relationship, it has become a wide partnership, which has benefited
from a sound institutional framework. The cooperation has embraced climate change issues, with
strong linkages between energy security and environmental security.
There are several drivers for Europe's interest in strengthening environmental partnership with
China. Europe has a comparative advantage in the field and has the opportunity to use this to gain
bargaining power. China is a profitable market, both for the export of European environmental goods
and for European firms seeking to invest locally. Moreover, helping China to diversify its energy mix
and to improve its energy efficiency would have positive spillovers for the EU in terms of reduced
global demand.
From the Chinese perspective, there are several reasons to engage with the EU, which include the
latter’s long experience in this sector and China’s need to implement “more sustainable growth
strategies.” There are clear synergies between China’s search for a more sustainable growth path and
the EU’s capacities in environmental protection and renewable energy technologies.

This book gathers some of the main findings of the EU-funded project POREEN on partnering
opportunities between Europe and China in the renewable energies and environmental industries. As
a Marie Curie action, POREEN’s goal was to produce research results which inform policy, while
improving knowledge and research skills. Research outputs were developed leveraging academic
mobility in China and Europe, particularly of young researchers. Their common objective was to seek
to highlight opportunities to expand and develop this important relationship in a way that moves both
regions toward a more sustainable future.
In a four-year time frame, researchers analyzed the opportunities and potential to boost
cooperation between China and Europe in this important area. They used a variety of research
approaches and academic perspectives, combining economic, legal, and engineering perspectives.
The economic dimensions of the project included the identification of critical issues, gaps, and
potential for bilateral foreign direct investments and trade in the broad area of green industries. Legal
research had a similar objective, but focused on offshore oil and gas extraction, renewable energies,
corporate responsibility, and environmental legislation. The team’s engineering research relates to
energy efficiency and carbon dioxide reduction, particularly concerning transportation and lowcarbon buildings.
The book is structured into three interrelated and connected parts.
Part I has an economic and policy orientation. The seven chapters examine different aspects of
trade and foreign direct investment relations between Europe and China, in the renewable energies
and/or environmental industries. Bilateral trade and FDI flows are analyzed, also in the light of


Chinese and European green policy and cooperation initiatives. Authors identify obstacles, barriers,
and difficulties faced by European and Chinese firms in initiating, maintaining, and consolidating both
trade and investment initiatives in China and Europe, respectively. Key factors and issues to be
addressed to further stimulate EU–China trade and investment flows are also considered.
Part II addresses the legal framework of EU–China cooperation. The first two chapters describe
the Chinese environmental protection system, analyzing both national laws and governance measures.
Then, the focus is on three specific themes: the electric sector in China, Corporate Social
Responsibility in a comparative perspective, and the legal framework for civil liability for
environmental damages deriving from energy misuse.

Part III is focused on engineering-related research activity. Two main research areas are
developed, both related to energy efficiency and carbon dioxide reduction: mobility and the
transportation sector and low-carbon buildings. The four chapters in this part highlight the state of the
art of the engineering research group in key areas (mobility and the transportation sector and lowcarbon buildings) that might have a huge potential impact on bilateral cooperation between Europe
and China. One topic is related to the use of methane and biomethane, both in its compressed and
liquid form, as an alternative fuel to reduce the environmental impact and GHG emissions in the
transport sector. In general, biomass as feedstock energy source in China and its potential has been
evaluated in detail. Whereas on the topic of low-carbon buildings, the use of heat pumps and district
cooling/heating networks have been considered in order to increase the energy efficiency for space
heating and domestic hot water production. Moreover, smart devices in buildings, studied on
experimental test rigs, for thermal comfort and consumption reduction have been presented.
Together these diverse inputs seek to contribute to a more integrated, coherent and effective
approach to EU-China cooperation in the sector.
Francesca Spigarelli
Louise Curran
Alessia Arteconi
Editors


Part I
Europe and China Integration through Trade and
Foreign Direct Investments


CHAPTER

1
Policies That Promote Environmental Industry in
China
Haitao Yin, Francesca Spigarelli, Xuemei Zhang and Hui Zhou

ABSTRACT
Purpose – We aim to comb the current policies that have been developed to promote the
environmental industries in China and analyze them in a comparative manner.
Methodology/approach – We mainly use the method of text study to study the existing policies
that Chinese central government published to promote the development of environmental
industry. We built a database of policies and regulations from 1979 to 2015 by searching the
official website of the Ministry of Environmental Protection of China.
Findings – We find that the existing policies focus on command and control approaches.
Policies are more oriented to the stage of production instead of stages of investment and
consumption. They rely more on negative incentive when stimulating supply and positive
incentive when encouraging demand. Based on existing academic wisdom, we suggest that
Chinese government should pay more attention to environmental economic policy and to
stimulating demand for environmental products.
Originality/value – Few studies provide a systematic overview of the policy systems that
have been developed to promote environmental industry in China in a systematic manner.
Keywords: Environmental industry; policy; regulation; China; text study; research paper

Introduction
A cleaner and less energy-intensive development is a fundamental goal to be achieved for China.


Public awareness, mostly in the urban population, has been rising on the need to have access to
cleaner water, air, and soil, while the human costs of pollution are increasing rapidly ( Lv &
Spigarelli, 2016).
Sustainability of industrial growth as well as the health and safety of the population are priorities
for the Government (China Greentech Initiative, 2013, p. 69). In the last years, all dimensions of
energy security have been promoted, from availability of energy resources, applicability of
technology, societal acceptability, to the affordability of energy resources (Yao & Chang, 2014).
The 12th five-year plan has set several measures to address environment issues in the country,

which are considered as relevant as “economic restructuring” and “social equality.” The Third
Plenary Session of the 18th Communist Party of China confirmed and strengthened measures to
support China’s commitment and has placed environmental issues as the key reform priority. 1 Also,
within the 13th five-year plan, the green growth is a priority. In the next five years, China is going to
promote clean production, green and low-carbon industry systems, and green finance.
All measures set to promote energy saving, environmental cleanup, and the expansion of use of
renewable energies are affecting demand and supply trends in China (China Greentech Initiative,
2013). Competitive national companies are growing in all relevant subsector of the green industry
(Lv & Spigarelli, 2015). In this chapter, we focus on policies that have emerged in China to promote
the development of environmental protection industries. A better understanding of these policies and
their potential impacts is essential for better policy coordination and future policy innovation, also in
the light of international cooperation.
In the literature, researchers have made some efforts to combine this large and growing body of
policies through categorizing them. Some understand these policies from the perspective of
emphasized industrial aspects: energy saving, environmental protection, and resource recycling,
while some classify them based on policy approaches; for instance, economic measures, technology
measures, and regulatory measures (Ren, 2009) or macroeconomic policy, industrial policy, and
pricing policy (Zhao & Hong, 2010). The classifications are developed mainly for a descriptive
purpose, and often based on an ad hoc selection of policies. The existing literature does not provide
much insight on policy effectiveness and does not attempt to reveal the linkage between policy
approach and its effectiveness. Therefore, they cannot well serve the purpose of developing a better
policy or a set of policies; that is, a prescriptive purpose.
Our study is a step to fill this gap. We collected all policies that China’s central government has
published to promote environmental protection industries from 1979 to 2015 and tried to look at these
policies from different angles. Based on the academic observations that scholars have provided on
the effectiveness of different types of policies, we offer suggestions for future policy development
and implementation.

Chinese Environmental Policies: Looking at the EU and
Moving Globally

In spite of its huge efforts in combating environmental pollution, China is still plagued with serious
and increasingly challenging environmental issues. According to the 2013 Report on the State of the


Environment in China (RSEC), China was the world’s largest producer of COD and SO2. China was
also the biggest energy consumer, accounting for 22.4% of the global consumption (BP, 2014). Overdependence on fossil fuels – 67.5% from burning coal and 17.8% from oil – made things worse. As
reported by the 2013 Global Carbon Project (Carbon Dioxide Information Analysis Center, 2013),
China has passed the EU for the first time in terms of per capita CO2 emissions in 2013 and occupied
a greater share (27.6%) of global emissions than both the United States (14.5%) and EU (9.6%). The
severe environmental problems are a byproduct of China’s tremendous economic growth in the past.
It is now increasingly clear that environmental damages, for instance, huge resource consumption,
ecological destruction, and frequent environmental accidents, are gradually becoming a constraint on
future development and stability in China. Together with mounting domestic as well as international
pressure for better environment and lower carbon emission, the efforts of Chinese government in
environmental protection has intensified recently.
Controlling the growth of polluting industries, increasing pollution abatement investment, and
developing environmental industry are the three main alternatives. The first two often imply
increasing production cost or slowing down economic expansion, in conflict with corporate interests
and the governmental goals of maintaining a reasonably high growth rate (Wang, Yin, & Li, 2010).
Therefore, the third option of developing environmental industries is somewhat favored, and viewed
as a way to better reconcile economic growth and environment protection simultaneously. As a result,
recent years have witnessed a growing interest in the development of environmental industry.
Although promoting environmental industries as a strategy for sustainable development has caught
attentions since early 1980s (Wang, 2012), it wasn’t seriously explored by all levels of governments
until 2010. On September 8, 2010, environmental protection industry was listed as one of seven
strategic emerging industries that should be promoted in the Decision of the State Council on
Accelerating the Development of Strategic Emerging Industries (DADSEI), and was unequivocally
supported by the central government. Later, the 12th five-year plan, published in 2011, further states
that environmental industry should be the top priority among all government-favored strategic
emerging industries. The plan claimed that the total output of environmental industries should strive to

reach 4.5 trillion yuan by the end of 2015, with a 15% average growth rate and accounting for 2% of
GDP. This provided a new opportunity for the development of environmental industries in China.
After the DADSEI and the 12th five-year plan was introduced, a number of supporting policies
and regulations were put into place. According to Zhang, Gao, Wang, Guo, and Wang (2014), about
550 policies regarding energy conservation and environmental protection were published during the
period of 2010–2013, which occupy nearly half of the total (1,195 ones) since 1978 (Zhang et al.,
2014). In this chapter, we study all environmental policies that are published by central government
and are released on the website of Ministry of Environmental Protection (MEP) from 1979 to May
2015. We follow MEP’s classification on its official website and summarize the number of different
types of policies in Table 1. Policies from provinces or lower levels of governments are excluded,
which explains why our number in Table 1 is smaller than that of Zhang et al.’s (2014).
Table 1: Policies Issued by MEP.
Content

Number

Environmental laws
Regulations

33
180


Rules
Environmental economic policy
Environmental credit system policy
Environmental fiscal policy
Green taxation policy
Green credit policy
Polluting responsibility insurance policy

Green security policy
Green price policy
Environmental trade policy
Government green purchase policy
Eco-compensation policy
Emission trade policy
Others
Sum

489
123
5
58
7
10
2
4
7
4
6
7
3
9
825

Source: China’s Ministry of Environmental Protection Official Website www.mep.gov.cn

While promoting internal change for environment protection, China is also looking at cooperation
with international partner as an opportunity to learn and also to affirm its role on the global fight for a
cleaner world.

A special role in the international landscape is played by cooperation with Europe. The EU and
China have been co-operating on environmental issues for a long time. While the relation started as a
mainly trade-oriented relationship, it has become a wide partnership, which has benefited from a
sound institutional framework (De Matteis, 2010, p. 457).
European interest in strengthening environment partnership with China can have several
motivations (De Matteis, 2010, p. 464). China can be considered a profitable market, for selling
European environmental goods. Moreover, helping China to diversify its energy demand and to
improve its energy efficiency could help Europe in the competition for energy supply (Freeman &
Holslag, 2009). On the other hand, China has several reasons to engage with the EU, which include
the latter’s experience in these areas and China’s need to implement “more sustainable growth
strategies” (Gill & Murphy, 2008).
At the moment, Europe and China cooperation is developed through three main channels and two
specific programs (see Table 2).
Table 2: Environment Cooperation Program between Europe and China: Main Initiatives.
Channels of Cooperation

1. T he Environment Policy Dialogue, at ministerial level. Since 2003 meetings have
been taking place regularly, alternating between Brussels and China.
2. Bilateral cooperation mechanism on forests (BCM), between the Chinese State
Forestry Administration and director level at the EC (since 2009).
3. T he Climate Change Partnership, developed by Directorate General of the EC on
climate action.

Specific Programs
1. EGP, T he EU-China Environmental Governance Program (2011–2015)
In partnership with the Chinese Ministry of Environmental Protection,
EGP aims to contribute to the strengthening of environmental
governance in China through enhanced administration, public access to
information, public participation, access to justice and corporate
responsibility in the environmental field

( />2. ESP, T he EU-China Environmental Sustainability Program
Launched in September 2012, the project aims to support China’s efforts
to meet the environmental and climate change targets defined in the 12th
five-year Development Plan. T he specific objectives focus on the
achievement of environmental sustainability through improved water
quality and the prevention and control of heavy metal pollution and
implementation of sustainable solid waste management.


Source: />
EU-China cooperation is expected to be strengthened in the near future also considering outcomes
of the recent COP21. All countries that are members of the United Nations Framework Convention on
Climate Change (UNFCCC) – 195 nations, plus the EU – have agreed to adopt a new global climate
agreement in Paris in December 2015, which will take effect in 2020.2 Based on declaration of
President Xi Jinping, China will “on the basis of technological and institutional innovation, adopt
new policy measures to improve the industrial mix, build low-carbon system, develop green building
and low-carbon transportation and establish a nationwide carbon-emission trading market.”3
China has committed to strengthen cooperation with the EU to launch a nationwide carbon
emission trading market in 2017.

Research Methods
Within the general international and national policy framework described in the previous paragraph,
we mainly use the method of text study to analyze the existing policies that Chinese central
government published to promote the development of environmental industry. The environmental
industry in our chapter means the industries whose development clearly contribute to environmental
protection, including the environmental protection services and the production of environmental
protection products, resource recycling products, and environmentally friendly products (2011
Report on the State of the Environmental Protection Relative Industries in China).
We developed a database of policies and regulations that promote environmental industry through
an effort of searching the official website of the MEP, which is responsible for environmental affairs

and compiles almost all policies and regulations related to the environment protection in China from
1979 to May 2015. Totally, we find 825 policies published by the central government, which surely
have something to do with environmental protection. Part of these policies may only remotely relate
to the goal of promoting environmental industry. For instance, “Regulations of the People’s Republic
of China on Nature Reserves” published by the State Council in 1994 aimed to protect the natural
environment, but has little direct connections with the promotion of environmental industry. We
deleted such policies and then analyzed the remaining 469 policies.

Analysis of Existing Policies for Promoting Environmental
Industries
LAWS, REGULATIONS, RULES, AND ECONOMIC POLICIES: AN OFFICIAL
TYPOLOGY
On its public website, the MEP classifies all its policies into four types: laws (Fa Lv), regulations
(Fa Gui), rules (Gui Zhang), and economic policies. In contrast to economic policies, the first three
can be described as commonly known command and control policies. Command and control policies
rely on governmental coercive power; on one hand, publishing policies that firms and other


organizations must comply with and on the other hand, monitoring the regulated entities to make sure
that the policies are well enforced. The difference between laws, regulations, and rules lies in their
legal authority, with Laws the highest and rules the lowest.
Figure 1 shows how the identified environmental industries promotion policy fits into these four
categories. It is clear that related laws are quite few and rules dominate the existing policies.
According to Figure 1, only three laws were passed: Cleaner Production Promotion Law of the
People’s Republic of China (PRC) (2002), Law of the PRC on Conserving Energy (2007), and
Circular Economy Promotion Law of the PRC (2008). Rules account for about 66% of the policies
that promote environmental industries. The MEP has drawn up standards and technical requirements
covering almost all aspects of environmental pollution, such as water, air, waste, noise, and soil
pollution.

Figure 1: Laws, Regulations, Rules, and Economic Policies. Source: MEP website
www.mep.gov.cn
Although serving as the cornerstone of the regulatory systems for environmental protection,
command and control policies have been criticized for its high costs (Tietenberg, 1985), enforcement
difficulties (Yin, Pfaff, & Kunreuther, 2011) as well as the lack of incentives for innovations (Popp,
2003). In response to the weaknesses of command and control policies, two kinds of efforts have
been tried. First, increase the penalty for regulatory violation to ensure compliance with command
and control regulations. For instance, the “Environmental Protection Law (EPL)” was revised in
2014 to impose tougher penalties on violators. In order to deter violations like illegal discharge,
Article 59 of the new EPL stipulates that violators who refused to correct their violations will
receive daily fines with no limit. At the same time, detention punishment was first introduced for
excessive discharge. According to Article 63, the responsible persons who allow building before
approval will be heavily fined or detained. Moreover, for those violations that are so serious as to
constitute crimes, Article 69 shows clearly that criminal responsibilities shall be affixed.
The second effort is to develop so called environmental economic policies, which attempt to
utilize the market power and economic incentives to solve the enforcement, cost, and innovation


issues. The most noted environmental economic policies include tax, subsidy, trade of emission
rights, environmental insurance as well as information disclosure (Portney & Stavins, 2000).
Environmental economic policies emerged in China after 2006 and they now account for about
20% of all the policies. For instance, preferential taxation provides incentives to induce market
capital to flow into environmental industries through reducing the tax burden of participants. It could
take different forms including tax exemption, tax deduction, tax credit, tax offset, preferential tax rate,
tax deferral, tax rebate, and the like. Article 27 of the “Income Tax Law of PRC for Enterprises”
stipulates that the enterprises that engage in the eligible projects of environmental protection, energy
conservation, and water conservation can enjoy tax exemption or reduction. According to Article 33
and 34, the income that enterprises obtained through business activities that are in line with national
industrial policies of comprehensive use of resources may be eligible for tax deduction, and
enterprises that purchased and invested in equipment for environmental protection, energy, and water

conservation, and safe production may be eligible for tax offset. Figure 2 shows the growth of
environmental economic policies over the years and contrast it with the growth of rules. It is clear
that although the number of economic policies grows very fast, but is still outpaced by rules. The
existing policies for promoting environmental industry in China are still dominated by command and
control policies.

Figure 2: Number of Rules and Economic Policies over Time. Source: Authors’ Coding of Policies
at MEP website.

INVESTMENT, PRODUCTION, TRADE, AND MARKET: A “VALUE CHAIN
PERSPECTIVE”
Chinese government realized that the development of environmental industries needs efforts from all
stages in the process of value creation, and therefore developed policies that incentivize each of these
stages. In this subsection, we first give policy examples for each of the following stages: investment,


production, trade, and market. Then we would step back, take a look at which parts have attracted
more attentions and whether there is still space for improvement.

Investment

Obtaining investment stands as the first step to develop environmental industries. Chinese government
brings forward various measures to encourage investment in environmental industries and discourage
money from flowing into environmentally questionable industries. For instance, under the Renewable
Energy Law, Chinese central government set up a special fund to back up the development of
environmental industry. It can be used into two forms. First, it can be distributed as a grant to support
the environmental technology R&D. Second, it can be used by environmentally friendly enterprises to
pay part of their loan interest. This would help companies to lower their capital costs.
Another interesting policy is green credit and energy efficiency credit. In July 2007, State
Environmental Protection Administration, People’s Bank of China, and China Banking Regulatory

Commission (CBRC) published the “Opinion on Implementing Environmental Protection Policies
and Regulations and Preventing Credit Risk,” declaring the comprehensive entrance of green credit
as a new weapon against environmental pollution. Green credit serves as a financial lever in the area
of environmental protection. For environmentally friendly industries, financial institutions promise
preferential low interest rates to encourage their development. But for polluting firms, banks punish
them with lending restrictions and high interest rates. Through establishing the environmental
threshold for loan access, banks cut off the original capital chain of high-pollution, energy-intensive
firms, and channel money to environmental industries. However, in the early stage, the standard of
green credit was vague because of the lack of a list of what is and isn’t environmentally friendly. The
“Green Credit Guide” issued by the CBRC in 2012 remedies the defect. The guide also sets a clear
requirement for financial institutions that they must carry out the evaluation of green credit at least
once every two years, as well as an effective supervision system. According to the data that CBRC
released in 2014, the loan balance of 21 main banks on environmental protection projects are about
4.16 trillion yuan, accounting for 6.43% of the total loans (Yang, 2013). Studies have found that green
credit policy has effectively encouraged companies to improve their environmental performance and
help shifting industrial activities to environmentally friendly fields or/and environmentally friendly
companies.
Following the footprints of green credit policy, to support energy-using units in improving energy
efficiency and reducing energy consumption, “Energy Efficiency Credit Guide” was announced by
the CBRC together with the National Development and Reform Commission (NDRC) in early 2015
The guide encourages financial institutions to support credit loan to energy-saving programs, and lists
the standards and category of energy-saving programs that should receive favorable treatment.

Production
China used to be and still is a highly centralized country. It has a strong tradition in intervening in
economic activities. In the efforts of developing market economy, this tradition has been weakened
and the intervention takes more economic approach such as subsidy instead of direct administrative
orders. Together with the label of “environmental industries have strong positive externalities,”
Chinese government widely used fiscal subsidies to promote the development of environmental

industries, mostly on the stage of production.
According to the “Implementation of the Central and Local Budgets for 2014” submitted by
China Ministry of Finance, a considerable amount of expenditure in the 2014 national account book
has been used to subsidize environmental protection: 47.85 billion yuan for energy conservation and
emission reduction, 11.55 billion yuan for air pollution control, and 17.62 billion yuan for natural
forest protection. Taking the promotion of renewable energy development as an example, according
to Article 20 of the “Renewable Energy Law” (REL) and the “Renewable Electricity Pricing and
Financing,” renewable power plants are allowed to recover the cost above conventional power
through feed-in tariff – a kind of cross-subsidization. Up to now, five large-scale subsidy programs
have been implemented, and 1,770 renewable energy power plants have received subsidies. Except
for renewable energy power generation, subsidy is also given to the construction of grid that connects
renewable electricity and independent public renewable power systems.

Trade
As a huge open economy, Chinese governments also pay attention to the trade and develop policies to
promote the export and import of environmentally friendly products, and to control and limit high
polluting and energy-consuming ones. Basically, the policies use two approaches: one is using
taxation to encourage or discourage the trade; the other is stopping or limiting the trade of certain
products. As early as 1997, the State Council made a notice to adjust the taxation on imported
equipment. The notice stipulates exemption from tariff and import-linked value-added tax for
imported equipment belonging to government-flavored important programs, which include the
development of environmentally friendly industry. In 2005, NDRC together with other core
government departments (Ministry of Finance, Ministry of Commerce, Ministry of Land and
Resources, General Administration of Customs, State Administration of Taxation (SAT), and MEP)
announced “Measures to control the export of some high energy-consuming, high pollution and
resource products.” The notice announced some measures to discourage the export and import of the
environmentally unfriendly products, such as stopped approving processing trade contracts of some
high-pollution products, canceled the export rebate of coal tar, hide, pelt and others, decreased the
export rebate rate to only 5% for 25 kinds of pesticides, limited the exportation amount of resource

products like rare earths and gasoline.
Most of the existing policies focus on controlling and discouraging the trade of environmentally
unfriendly industry, which mainly refers to highly energy-consuming, highly polluting, and resource
intensive products. There are several policies that clearly and directly promote the environmental
industry in the trade or investment part in the process of value creation. The “Catalog for the
Guidance of Foreign Investment Industry (amended in 2007)” issued by NDRC and Ministry of
Commerce listed the recycling economy, clean production, and other industries into encouragement
catalog, encouraging foreign investment into the environmental industry. Take the Sino-EU trade for
example, the central finance budget arranged a special fund for the energy saving and emission
reduction research corporation of Sino-EU small and medium enterprises, aiming to support the R&D
corporation, technology innovation, and scientific achievement exchange in the field of energy saving
and emission reduction. In 2011, Ministry of Finance (MF) and Ministry of Science and Technology
(MST) issued a measure to manage the fund, and four million yuan was aided for 19 programs in


2013, among which 17 are R&D programs (MST). The government gives financial support to the
corporation of environmental industry between China and Europe Union, but so far the support still
stays in the stage of scientific research.
The trade in environmental industries continues developing. The export contract value of
environmental protection industries in 2000 is 1.41 billion dollars and grows to 33.38 billion dollars
in 2011, much faster higher than the growth of GDP (Report on the State of the Environmental
Protection Relative Industries in China in, 2000, 2011).

Market
The last step in the process of value creation is marketing and sales. Chinese government has
developed policies to help increase the market acceptance and popularity of environmentally friendly
product. Increasing government purchase is probably one of the most commonly tools to encourage
consumption of environmentally friendly products and services in the world. Since Chinese central
and local budget departments first took “green government purchase ” into practice in 2007, the
government has been shifting its purchasing demands to energy saving and environmentally protection

products, which successfully played a role model for the public. Moreover, the “Notice about
Building the System of Government Procurement of Energy Saving Products” announced by the
General Office of the State Council in July 2007 made it clear that, on the premise of satisfying the
needs, energy-saving products must be the priority when governments use financial funds to conduct
purchasing activities, which formally lifted government green purchase to be a mandatory
requirement. At the same time, the notice also claimed to set up a priority product list for the
convenience of all levels of governments to choose from.
In the latest “Government Procurement Act” (the State Council Order No. 658) passed by the
75th State Council Executive meeting on December 31, 2014, the Article 6 repeats the role of
environmental factors in the government purchase process. Through establishing purchase demand
standard, reserving procurement share and offering preferential price, government shall give priority
to purchase products conducive to energy conservation and environmental protection, and thereby
promoting the development of environmental industry.
Figure 3 describes how the existing policies distribute along the different stages of value chain. It
reveals that 65% of the policies focus on production process, while only 13% of the mare oriented
toward marketing and consumption part. Wang et al. (2010), in their study of China’s policies on
promoting renewable development, argued that the focus on production has resulted in excessive
production capacity in renewable electricity, much larger than the lagged development of demand. As
a result, it is observed that many renewable generators are not connected to the state grid and stand
there idle for most of the time, or running at a very low operational efficiency. Yin (2014) further
argued that many so called environmental industries, for instance the photovoltaic industry, are highly
polluting and energy intensive in the production process. The PV products produce positive
externality only when they are used. Therefore, government subsidies should be given the
consumption or the use of PV products, instead of the production of PV products.